Improvements at Abercrombie, but Wall Street Still Cautious on the Stock

As sales of graphic Ts increase, that has helped boost sales of logo merchandise.

Teamwork and communication seem to be the keys for Abercrombie & Fitch Co.’s third-quarter improvement, a combination that helps the retailer make better use of its agile supply chain.Fran Horowitz, chief executive officer, told WWD in a telephone interview after Friday morning’s earnings report, “We have an agile supply chain, but it’s been a matter of the [new] team growing in experience.”That experience and learning also allow the company to micro-target to consumer preferences at its stores, as opposed to shipping the same product to all stores regardless of geographic area, seasonal changes or fashion tastes. “Generally, we’ll see some stores are higher fashion stores, and others are higher-core business stores,” she said.The ceo also said, “There are four categories — denim, outerwear, fleece and graphics — across both brands where we need to win for the fourth quarter.” She also noted that the trend cycle that’s growing for graphic Ts is also helping with sales of logo merchandise on the shelves.She told Wall Street during the morning’s conference call, “This quarter, the team continued to spend significant time in stores across the brand, leading to better testing, sharper insights and faster responses.”That has allowed the team to make better decisions on what to have on its shelves, and even what items to put back into production quickly if they find that those products are resonating with consumers.While inventory levels are higher than a year ago heading into the fourth quarter, much of that increase is due to having better in-stock levels on the top 30 items that the company thinks will be the most sought-after merchandise, compared with a year ago. According to the ceo, the company wanted to have merchandise on hand to drive sales from one quarter to the next.The company posted adjusted earnings per share of 30 cents for the quarter ended Oct. 28, on sales that rose 4.5 percent to $859.1 million. Overall comparable sales gained 4 percent, with Hollister up 8 percent and Abercrombie down 2 percent. Wall Street’s consensus estimate was 22 cents on sales of $818.9 million.Shares of Abercrombie climbed 23.9 percent to close at $15.55 in Big Board trading. More than 18.4 million shares changed hands versus a three-month average of 2.9 million shares, although the high trading volume likely was due to heavy short interest in the stock.Even though the company has been spending more time working on marketing and digital efforts to better connect with the consumer — Horowitz told analysts that a study by Brand Index showed that consumers between the ages of 18 and 34 now have a better and more positive impression of the Hollister and Abercrombie brands — Wall Street remains cautious on its turnaround.Jefferies analyst Randal J. Konik said Abercrombie’s “sizable third-quarter beat, driven by a better top line, [was] partially offset by a weaker gross margin. We are encouraged by the signs of a sustainable turn at Hollister and the green shoots at Abercrombie & Fitch, although we think EPS upside may be mitigated by challenges in driving gross margin improvement.” The analyst has a “hold” rating on the stock, noting both that gross margin pressures aren’t going away and that inventory build is always a risk.RBC’s Brian Tunick noted as positives the company’s boost in capex by $10 million to $110 million, and that Hollister’s 8 percent comp is “one of the best that we’ve seen in the third quarter,” but nevertheless kept his rating a “neutral” due to the company’s structural challenges and lack of visibility on long-term EBIT margin profile of the business.And Dana Telsey of Telsey Advisory Group left unchanged her “market perform” rating, even though she noted that Abercrombie’s management “deserves credit for righting the ship to some degree.” She noted that while “comp performance and outlook are better than expected, it does come at a lower gross margin than the market had forecast.”

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